Bank Compliance Costs In Question

Economists Say Banks Inflated Their Estimat Of Costs To Comply With Government Regulations.

April 7, 1993|By American Banker

CHICAGO — In arguing for regulatory relief, banking lobbyists have been using inflated estimates of compliance costs that do not account for offsetting financial and social benefits, a group of Indiana University economists has concluded.

Their study, commissioned by the University of Wisconsin, put the costs of complying with 15 consumer protection and public interest rules at 13.6 percent of pretax income in 1991.

The conclusion, based on a survey of 445 banks of all sizes, contrasts with estimates of 24 percent and 45 percent given by the Independent Bankers Association of America and the American Bankers Association, respectively.

Those groups incorporated certain basic expenses - such as formal written policies - that should be considered normal costs of doing business, said Robert W. Klockars, dean of the graduate banking school at the University of Wisconsin. ''We think our figures are a lot more accurate.''

To be sure, even the conservative findings of the Wisconsin study, which was funded by the banking school's Herbert V. Prochnow Educational Foundation, raise questions about the effectiveness of laws that have made regulatory compliance a challenge for banks.

Among those often complained about are the Community Reinvestment Act, Truth-in-Lending Act and Equal Credit Opportunity Act.

By eliminating required paperwork and passing the savings along to consumers, banks would be able to reduce loan rates by a percentage point, according to the study.

About 19 percent of the banks surveyed said they had restricted product offerings because of CRA concerns. And there was an overwhelming sense that consumers do not even read most of the special disclosures banks are required to provide.

Klockars said it is becoming clear that discussions about compliance costs are being conducted in a vacuum.

Not only is there no ''significant'' research into whether consumers place value on bank disclosures, he said, but there is no data on interest and fee income that banks add by making CRA loans and providing other services in compliance with various rules.